QuidelOrtho Corporation

Welcome to the Quidel Ortho third quarter 2022 financial results conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Brian Brockmeyer, Vice President of Investor Relations. Brian?

Thank you, operator. Good afternoon, everyone, and welcome to the Quidel Ortho Third Quarter Financial Results Conference Call. With me today to discuss our financial results are Doug Bryant, Quidel Ortho's Chairman and CEO, and Joe Buskey, Quidel Ortho's Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. and a version of today's presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. The statements we will make during this call about the company's future expectations, plans, and prospects include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a safe harbor for such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under risk factors in our quarterly report on Form 10-Q filed with the SEC on August 5, 2022, and subsequent reports filed with the SEC. Please refer to our SEC filing for a more detailed discussion of forward looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward looking statements we make or are implied by our statements will be realized. Furthermore, such forward looking statements represent management's judgment and expectations as of today. Except as required by law, we undertake no obligation to update any forward looking statement or any time-sensitive information to reflect future events, developments, or changed circumstances for any other reason. Also, during today's call, to facilitate a comparison of the company's operating performance from the third quarter of 2021 to the third quarter of 2022, we'll be discussing supplemental third quarter 2021 revenue and other supplemental adjusted operating results as if Quidel and Ortho have been combined for the applicable periods. We will refer to this information as our supplemental combined information. This supplemental combined information as well as certain other items we will discuss do not conform to US generally accepted accounting principles or GAAP. Please see slide three for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon. both of which are available on the investor relations page of the Quidel website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Doug Bryant, Quidel Ortho's chairman and CEO.

Doug? Thanks, Brian. Good afternoon, everybody, and thank you for taking the time to join our call today. The first call in which we are reporting results achieved as a combined company. When I look at our financial results for the quarter of this year, the third quarter, the underlying base business grew 6% year-over-year. Despite industry-wide headwinds, constant currency revenue growth excluding COVID-related revenue grew 3%, driven by strength in our point of care and transfusion medicine businesses. The Beckman BNP assay transition was a three percentage point headwind to revenue in the quarter. Adjusted EBITDA margin of 29% and adjusted EPS of $1.85 reflect very good operating leverage and solid earnings for the quarter. These better than expected results position us to raise our guidance for the full year, which Joe will share in further detail in a few minutes. For the remainder of my comments, I will focus on the strategic priorities that I had outlined on our last earnings call, which are one, integration and corporate culture, two, product innovation, three, global commercial excellence, four, operational excellence, and five, capital deployment, beginning with the integration and our corporate culture. As I've mentioned previously, the integration of the organizations and preserving the best attributes of both cultures is the top priority for the executive team and especially for me. While it's still the early days since the close of the transaction, we're off to a strong start. Many teams across the organization have demonstrated exceptional focus, agility, and shared purpose as we've introduced new structures, processes, and systems to optimize our operations. I must say that communication and collaboration across the entire company, even among teams that weren't initially fully integrated, have exceeded my expectations. The leadership teams two levels below the office of the chief executive are established. And over the last quarter, our operations team implemented its new structure, joining finance, R&D, HR, legal, IT, customer service, and our four business units in achieving full team integration. Our commercial teams outside the U.S. are also fully integrated. The last remaining team to fully integrate is the U.S. commercial team. We've identified every role and by the end of this year, the new organizational structure will be communicated. Product training and cross-selling are expected to begin in the first quarter. With the organizational work substantially completed, we've now identified and announced our operating structure from the executive leadership team down through all supporting levels, a real milestone that aligns and strengthens the impact of our entire organization. Although we've made significant strides in integration, our work continues. Our integration program management group continues to track 15 active work streams with milestones identified through the first quarter of 2023 and continued planning for future state operational processes and efficiencies. Teams have been engaged, cooperative and professional, fully embracing the collaborative culture and teamwork needed to deliver on our commitments when we announced the integration of the companies. This process highlights what we've been saying. While integrations are always challenging, we believe the combination of Coidel and Ortho is less complex than other integrations, in part because we aren't consolidating manufacturing facilities, don't have any product overlap, and our commercial teams don't have to start selling one product in favor of another. This merger, although bigger, is certainly simpler and more straightforward than what we accomplished very well with the integration of the Elyra assets a two-year process that required a dependence on transition services and significant third-party involvement to operate the business. Moreover, employees are largely happy with the combination and the opportunities that the combined company is creating. The very high response rate on our recent employee happiness survey demonstrated excellent employee engagement and preliminary results show very favorable responses. To that end, our employee turnover is at expected low levels, giving us confidence that we are securing the talent we need to successfully complete the integration, execute on our strategic priorities, and drive strong, sustainable growth. I couldn't be prouder of our team and our progress. Turning to cost synergies, we have now identified at least $50 million in cost synergies well above our $30 million 2023 target. We are amid our annual operating plan process and believe that there could be further upside. Moving on to product innovation. We are managing approximately 100 R&D projects, and there's opportunity to optimize our focus and our spend. During the quarter, we initiated an R&D portfolio review to rank our projects based largely on NPVs that have been adjusted for technical, market, and regulatory risks. This is helping us prioritize resources for the most important projects. As you can imagine, many of the most important R&D projects are to advance our Savannah, Sophia, and Vitros portfolios. Other exciting long-term projects include LeapFrog, SophiaQ, and our Next Generation Donor Screening Platform which Ortho used to call dry-dry. We will further expand on all of these at our December Investor Day. Today, I'll focus my comments on labs, Savannah, and Sophia. First, our labs business. For the second quarter in a row, the labs business unit launched seven new and refreshed assays globally. And importantly, we received China's regulatory clearance for the Vitros XT3400 chemistry system. With this approval and planned commercialization in Q4, this system will accelerate our China growth strategy by introducing next-generation digital imaging technology that enables higher testing throughput, improved testing accuracy, and best-in-class reliability. We are planning for manufacturing of the Vitro's line of analyzers in China. given localization requirements and expect these efforts to have an impact in 2023. Secondly, savanna. We are seeing demand in Europe and are increasingly confident that savanna placements and revenue will accelerate throughout 2023. We continue to focus on overcoming manufacturing and supply chain challenges as we ramp up production of both instruments and cartridges. Additionally, we completed development activities for all Savannah panels planned for launch in 2023. Yet in the U.S., there are signs that the expedited regulatory path for FDA emergency use authorization is changing, and we now believe that the surest pathway to full availability of Savannah instruments and panels is to include immediately 510 clearance and CLIA waivers. We are making that shift in both our regulatory and commercial strategies so that we can bring Savannah to the U.S. market as quickly as possible. Given the strong demand in Europe, Middle East, and Africa for molecular panels versus the limited opportunity we could achieve by launching in the later stages of the U.S. respiratory season, we are concentrating both our Savannah product output and all near-term commercial activities on Europe. and select other CE-marked countries. That said, we are moving forward on our U.S. launch plan, including the placement in Q4 of about 100 instruments to gather valuable data to support the full U.S. launch in 2023. With our global commercial team firmly in place, we believe a concerted push in Europe, Middle East, and Africa and other countries where we already have government clearances is warranted and can support our planned revenue targets for the year. And finally, Sophia. While peak respiratory virus season is just now beginning, Quidel Ortho's Virena data indicate and the CDC has reported increasing positivity rates of respiratory diseases, including COVID-19, influenza, and RSV. The influenza season began sooner in the U.S. than is typical. with high ILI activity in the Mid-Atlantic, Southeast, and increasing cases in the Midwest. Overall, positivity rates have reached 25.5%, the highest in 31 months, and positivity rates continue to climb. Influenza test revenue was therefore higher than we had anticipated or have seen in the non-slu quarter. On a per-instrument basis, non-COVID SOFIA revenue for the trailing 12 months was the highest since the third quarter of 2021 and continues to strengthen, driven by our full respiratory menu. As anticipated, we didn't see distributors stock up influenza tests significantly in the quarter, but we did see them build significantly higher inventories for RSV and strep, which are much smaller than influenza volumes. Our cumulative SOFIA placements now total 83,000 instruments, up from 80,000 last quarter, which may suggest healthy new instrument placement demand over the next several quarters. Next, global commercial excellence, our third strategic priority. The relationships that each of the US commercial organizations has developed and maintained over the years are strong. To take full advantage of those relationships, we are moving to a structure that Quidel had good success with, in which one team of sales representatives covers hospitals, clin labs, and blood banks, while a separate team of sales representatives works with our distribution partners as a force multiplier to cover physician offices, clinics, retailers, and other points of care. Additionally, with organizational structures in place in the other global regions, we are completing go-to-market analyses across the combined product portfolio. For the remainder of the year, our primary commercial focus is to finalize the integration of the U.S. commercial organizations, close 2022 strong, and be ready to enter our major markets as Quidel Ortho in January of 2023 as scheduled. In the meantime, despite industry-wide challenges in China, And with supply chains, our vitros integrated analyzer install base grew 11% year over year, and automation grew 24%. As those headwinds subside, we expect further penetration into the mid and high throughput lab segment with our integrated analyzers. Moving to our COVID point of care tests, the federal government announced its intent to purchase over 100 million additional at-home rapid tests from multiple domestic manufacturers. We continue to participate in the process and have advanced to the final stage. While we believe our success at some level is likely, the timing is uncertain. We are therefore not including any additional government revenue in our 2022 guidance. In the retail market for COVID tests, we continue to work with all major retail distributors on ways to expand our availability. During the quarter, we returned to shelves at all major retail distributors. And for one, we became their private label manufacturer. We believe that through a combination of current moderate factory output, current inventories on hand, and a strong supply chain, we're in good shape and can quickly scale up if we are confronted with demand surges in this respiratory season. including for respiratory pathogens such as influenza and RSV. Turning now to operational excellence. We're hard at work driving operational excellence throughout the organization with a particular emphasis on leveraging our balance sheet to strengthen supply chains. We believe that our ability to pivot quickly away from sole source supplier agreements could be a competitive advantage especially relative to smaller competitive entrants in our space. As an example, in the third quarter, we brought on more suppliers of semiconductor chips and grew our safety stocks generally, which have improved consistency of the supply of many raw materials. In the future, we believe that a track record of reliable product supply will become a must-have for our current and prospective customers. All companies are facing supply chain challenges, but not all are able to address them equally. Looking at our manufacturing capacity, we have capacity at our Rutherford site that manufactures up to 16 million quick-view tests per week. At our McKellar site, we have capacity to manufacture up to 4 million Sophia casettes per week. And at our Rochester site, we have the capacity to manufacture up to 53 million slides per week. with the two additional lines coming online in 2023 that will get us to 63 million slides per week. We now have approximately 600 open labs instrument orders, relatively flat sequentially. We expect that to modestly increase by the end of the fourth quarter, but we have a plan in place to begin clearing back orders in 2023. Lastly, over the past couple of months, we've overcome Savannah instrument supply chain challenges, begun ramping our instrument manufacturing capacity, and completed the setup and validation of the first of two low volume cartridge manufacturing lines. This allows us to expand our Europe, Middle East, and Africa commercialization for the current respiratory season. Our second low volume line is expected to be run online during the fourth quarter. we believe these two lines should be more than sufficient to meet pull-through demand given the number of instruments we expect to ship. Our two automated high-volume lines are expected to be up and running by mid-2023 ahead of our U.S. commercial launch. Our last strategic priority is capital deployment. A healthy balance sheet and consistent cash generation strategy give us the flexibility to allocate funds toward several strategic priorities. Our priorities are R&D investment, manufacturing capacity expansion, debt pay down, share repurchase, and lastly, strategic M&A. During the third quarter, we announced a $300 million share repurchase authorization. The repurchase program reflects our confidence in our long-term growth strategy the sustainability of a broad base of recurring revenues, cash flow, and the durability of our margin profile. We don't intend to consistently buy back our shares each quarter, and we don't need to complete the entire $300 million in the two years that it's authorized. We put the repurchase program in place to take advantage of what we view as a dislocation in the value of our shares. While the creation of our share repurchase program was particularly attractive in the third quarter relative to debt pay down, looking ahead, we intend to prudently balance our share repurchase program and our debt pay down. The in vitro diagnostic market has historically been relatively insulated from economic slowdowns. However, we are acutely aware of leverage concerns in an uncertain macro environment. We are required to pay down 200 million of our debt each year and have a preference to pay down even more, especially as cash flows benefit from COVID and other respiratory-related revenues that are greater than our long-term plan. With that, I'd like to turn the call over to Joe to further discuss our Q3 financial results and 2022 guidance. Joe?